Digital products tax-free under proposal House passed

The state House voted Wednesday to forego ever collecting sales taxes on digital products and services even as more and more of what Arizonans buy moves online – and untaxed.

HB 2479 would spell out in statute that the state cannot impose its 5.6 percent sales tax on everything from digital books and videos to cloud-based software, online storage and web hosting services. The 39-19 vote sends the measure to the Senate.

Left unanswered is whether Arizona is taxing any of that now and how much revenue the state stands to lose if the measure becomes law.

Rep. Michelle Ugenti, R-Scottsdale (Cronkite News Service photo)

Rep. Michelle Ugenti-Rita, R-Scottsdale, the sponsor of the measure, said estimates of foregone revenue are “inconclusive.” But she said if the Department of Revenue is now imposing such a levy, this measure will put a stop to it, saying it is the Legislature that should set tax policy, not state bureaucrats.

“There is no precedent for taxing this,” she said. Yet some taxpayers end up being hit up with the levy based on various administrative and court rulings.

“It is hit and miss,” said Rep. Vince Leach, R-Tucson of those rulings.

Ugenti-Rita said her legislation will “provide clarity to taxpayers, uniformity, and give businesses an idea of what we’re taking,” Ugenti-Rita said.

But even if there is no immediate loss, several Democrats said this is the wrong step to take, noting the shift in how people buy things.

For example, while people may have bought or rented a video, they can now stream it online. And the purchase of external hard drives for computers to store files is being replaced by cloud storage.

“Technology is constantly changing,” said Rep. Randall Friese, D-Tucson. He said it makes no sense to exempt all digital services from sales taxes even before lawmakers know what else will move online — and become exempt from the sales taxes that currently provide more than 47 percent of the state’s $9.5 billion budget.

“The industry is moving more towards hosting software and other applications for remote access,” Friese said. “As more of that happens and we move more toward that, aren’t we eroding our tax base, our tax revenue?”

And Friese said while providing clarity “may be a good thing,” he told colleagues it would be just as easy to provide that in a way that the presumption is that all these services are taxable, rather than the other way around.

Rep. Isela Blanc, D-Tempe, said lawmakers need to understand what they are doing.

“Revenues are declining because we continue to give tax credits away,” she said. “And now we are proposing to not even collect revenue.”

But Rep. Mark Cardenas, D-Phoenix, voted to support the legislation.

“This catches our tax code up to 2018 and beyond,” he said.

Cardenas also said that the current state of the law is that states cannot tax services that come from beyond their borders. He said if the U.S. Supreme Court does give states that authority the Legislature is free at that time to revisit the issue.